TMI Blog1985 (8) TMI 36X X X X Extracts X X X X X X X X Extracts X X X X ..... e? " The relevant assessment year is 1967-68. During that period, the assessee claimed a deduction of Rs. 7,364 as a business loss incurred in the supply of goods to the Gun Carriage Factory at Jabalpur, in accordance with the terms of the contract for supply of the goods. One of the terms of the contract was that in case of default in supply of goods according to the stipulation, the buyer could arrange for supply from alternative sources and recover the expenditure so incurred by it from the assessee. Some of the goods supplied by the assessee to the G. C. F. were rejected as not found to be in accordance with the specification and the G. C. F. obtained the same from alternative sources. An amount of Rs. 7,364 was recovered by the G. C. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The question is whether, on the above facts, the Tribunal correctly applied the law applicable. The relevant statutory provisions are contained in sections 28(1) and 37(1) of the Income-tax Act, 1961. The effect of these provisions is that any expenditure incurred for the purposes of business or profession shall be allowed in computing the income chargeable under the head " Profits and gains of business or profession ". The test, therefore, is whether the expenditure has been incurred for the purpose of business. After the decision of the Supreme Court in Haji Aziz and Abdul Shakoor Bros. v. CIT [1961] 41 ITR 350, it is beyond controversy that " infraction of the law is not a normal incident of business " and, therefore, any expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le loss arising as one of the consequences of carrying on such business. It was, therefore, held to be a permissible deduction in computing the profits from the assessee's business. Similarly, in Govind Choudhury and Sons v. CIT [1971] 79 ITR 493, the Orissa High Court took the view that the penalty for supply of inferior quality of goods was so integrally connected with the carrying on of the business of supply of the goods that the loss arising out of its payment was a permissible deduction from the assessee's income. The Allahabad High Court in CIT v. Reliable Water Supply Service of India P. Ltd. [1980] 124 ITR 199 has taken the same view and relied on these decisions of the Orissa High Court as well as some decisions of the Madras High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad) and the other decision is CIT v. Himalaya Rosin-Turpentine Mfg. Co. [1953] 24 ITR 132 (Punj), in which reference is made to the first decision. The Punjab case is distinguishable on the short ground that the amount claimed as deduction in that case was a penalty for breach of the rules, or, in other words, for infraction of law, which is not the case before us. Obviously, the penalty which was recovered for infraction of any law falls in a different category. The earlier Madras decision was based on the ground that the payment was made not for conduct of the business in a negligent manner but for conducting the business in a dishonest manner. Obviously, conducting of business in a dishonest manner was not treated as incidental to the bu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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